What Happens To Iran’s Oil Exports If Sanctions Are Renewed: Goldman Explains

President Trump is poised to announce over the coming days, that the landmark Iran nuclear agreement is no longer in the national interest of the United States. While the so-called “decertification” would not be the fatal blow to the Iran deal that Trump promised on the campaign trail, it would kick the issue back to Congress, which could potentially pull out of the deal entirely.

Supporters of the move say it could provide leverage to renegotiate the deal or have follow-on deals, and signal to Iran that the United States will not put up with other activities the United States sees as destabilizing but are not governed by the deal.  There is also a risk that such a move could backfire: Iran has already warned that more sanctions would be seen as a hostile aggression.

“The Americans should know that the Trump government’s stupid behavior with the nuclear deal will be used by the Islamic Republic as an opportunity to move ahead with its missile, regional and conventional defense program,” Guards’ commander Mohammad Ali Jafari said, quoted by Reuters. He then explicitly threatened US presence in the region, warning that “if America’s new law for sanctions is passed, this country will have to move their regional bases outside the 2,000 km range of Iran’s missiles.”

But even if no hostile actions follow, a major risk is that – as we wrote explained in November of 2016 in “Will Trump Send The Price Of Oil Soaring?” – as a result of the fallout from the Iran’s decertification, the return of sanctions could have a vast impact on the Iranian, and global, oil market. As Goldman’s Damien Couravlin writes, a decertification by Trump would put at risk the lifting of Western sanctions that have allowed 1 mb/d of Iranian oil to return to the market. Sitll, other signatories of the deal have however continued to voice their support of the deal (Reuters), with Iran further stating today that it was open to talks about its ballistic missile arsenal, seeking to reduce tension over the disputed program (Reuters).

In other words, the question over Iran’s crude oil output – should full sanctions return – is whether Europe would follow the US in resuming the embargo on Iranian oil exports, and whether Iran can find enough Asian market to offset the drop in European demand. Here is Goldman’s Damien Courvalin with the full explanation:

Iran back in the forefront of oil geopolitical risks

Beyond the uncertainty of what the US administration will announce, we believe the lack of international support for renewed sanctions exacerbates the uncertainty on any potential impact on oil exports. European buyers, which account for 25% of Iran’s 2.2 mb/d crude exports, could potentially stop their purchases to avoid falling foul of US secondary sanctions if those sanctions are unilaterally reimposed. We believe the key to the global oil market is whether these flows will be curtailed rather than simply redirected to Asia with the potential impact of eventual US sanctions on international insurance and shipping key to this outcome. 

Exhibit 1: The key to future Iranian production will be the ability to redirect flows to Asia if US secondary sanctions get reintroduced  

Net, we would expect that if US secondary sanctions are renewed, they would initially put at risk a few hundred thousand barrels of Iranian exports. Without the support of other countries, however, it is highly unlikely though that production would fall back to its pre-deal levels or that a drop in export is imminent.

The Trump administration has to certify to Congress on October 15 that Iran is compliant with the nuclear deal reached in 2015. The US president has been a vocal opponent of the agreement and the Washington Post reported yesterday that President Trump would announce soon that he will decertify the international deal to curb Iran’s nuclear program. While we take no view on the President’s decision, a decertification would put at risk the lifting of Western sanctions that have allowed 1 mb/d of Iranian oil to return to the market. The other signatories of the deal have however continued to voice their support of the deal (Reuters), with Iran further stating today that it was open to talks about its ballistic missile arsenal, seeking to reduce tension over the disputed program (Reuters).

There remains high uncertainty on what President Trump will announce. The Defense Secretary this week instead stated that it was in America’s interest to stick to the deal (Reuters). Further, the administration certified compliance in both May and in July. If President Trump refuses to certify compliance, the US Congress would have 60 days to consider options including re-imposing secondary sanctions on Iran and could decide not to act although a president executive order could bypass such an obstacle. National security waivers were used to suspend US secondary sanctions on Iranian oil exports, and President Trump could potentially cancel these waivers, which would lead to a ‘snap-back’ of the prior sanctions into place, without any requirement for Congress involvement.

Beyond the uncertainty on what the US administration will do, we believe the response by the other signatories (Britain, France, Germany, Russia, China, the EU) will be key to any potential oil impact. International comments from other major participants in the JCPOA (Joint Comprehensive Plan of Action) have been supportive of the agreement in its current form (Reuters). Today (10/6) alone a European commission spokeswoman commented that the deal was working, that it could not be renegotiated and that it was a ‘durable, long-term solution to the Iranian nuclear issue’ (Bloomberg). This has been backed up by a German Foreign Ministry spokesman suggesting that the Iranian nuclear deal was ‘important’ and worth keeping (Reuters), whilst the Russian Foreign Minister suggested that it was ‘very important to preserve it in its current form and of course the participation of the United States will be a very significant factor in this regard’ (Reuters).

Since the lifting of sanctions, production in Iran has increased by c.1mnb/d, with crude exports of 2.2 mb/d and around 0.5 mb/d of condensate. Around 60% of the export volume goes to Asia, with China (600kb/d), India (c.450kb/d), South Korea (c.300kb/d) and Japan (c.100kb/d) being the largest buyers. Since the lifting of international sanctions, European buyers have again started to take Iranian volumes, with around 25% now going to Europe[2]. From an oil market perspective, the risk is that even if other signatories continue to support the deal, European buyers could potentially stop their purchases to avoid falling foul of US secondary sanctions if those sanctions are unilaterally reimposed. This would leave Iran having to find alternative buyers, which would likely be in Asia where it sold its crude during the prior sanctions. It remains unclear whether US sanctions alone would impact the ability of international insurance and shipping companies to support this trade which was key to reducing overall Iranian flows in 2012-2015. Absent such a shipping constraint, the production impact should remain limited by the ability of Asia refiners to absorb displaced European volumes. As a result, while highly uncertain, we would expect renewed US secondary sanctions to initially put at risk a few hundred thousand barrels of Iranian exports.

Iran is seeking help to invest in major new field developments to boost production following the lifting of international sanctions. There have been several MOUs (Memorandum of understanding) signed to explore projects under the new Iranian Petroleum Contract, for example several international oil companies are set to present technical and commercial development plans for the Azadegan field (including Shell, Total, Inpex and Rosneft), but few firm commitments have been made for now. If US sanctions were re-imposed, western international oil companies would find it difficult to operate in Iran in our view, leaving a much smaller group of companies willing and able to invest, which might impact future production growth plans. One deal has gone through, with a 20 year agreement signed in July to develop South Pars phase 11 with Total (50.1%) and China National Petroleum Corp (19.9%, with Petropars owning 30%). If US secondary sanctions were re-imposed on Iran and should Total pull out of the deal, other partners could potentially take control of the project and move forward with the development alone.